Download Finland - European Commission

EUROPEAN
COMMISSION
Brussels, 18.5.2016
COM(2016) 292 final
REPORT FROM THE COMMISSION
Finland
Report prepared in accordance with Article 126(3) of the Treaty
EN
EN
REPORT FROM THE COMMISSION
Finland
Report prepared in accordance with Article 126(3) of the Treaty
1.
INTRODUCTION
Article 126 of the Treaty on the Functioning of the European Union (TFEU) lays down the
excessive deficit procedure (EDP). This procedure is further specified in Council Regulation
(EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit
procedure1, which is part of the Stability and Growth Pact (SGP). Specific provisions for euro
area Member States under EDP are laid down in Regulation (EU) No 473/20132.
According to Article 126(2) TFEU, the Commission has to monitor compliance with
budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned
or actual government deficit to gross domestic product (GDP) exceeds the reference value of
3% (unless either the ratio has declined substantially and continuously and reached a level
that comes close to the reference value; or, alternatively, the excess over the reference value
is only exceptional and temporary and the ratio remains close to the reference value); and (b),
whether the ratio of government debt to GDP exceeds the reference value of 60% (unless the
ratio is sufficiently diminishing and approaching the reference value at a satisfactory pace).
Article 126(3) TFEU provides that if a Member State does not fulfil the requirements under
one or both of the above criteria the Commission has to prepare a report. This report also has
to “take into account whether the government deficit exceeds government investment
expenditure and take into account all other relevant factors, including the medium-term
economic and budgetary position of the Member State”.
This report, which represents the first step in the EDP, analyses Finland's compliance with
the deficit and debt criterion of the Treaty, with due regard to the economic background and
other relevant factors.
Following the amendments to the Stability and Growth Pact in 2011, the debt requirement
has been put on an equal footing with the deficit requirement in order to ensure that, for
countries with a debt-to-GDP ratio above the 60% reference value, the ratio is brought below
(or sufficiently declining towards) that value.
On 13 January 2015 the Commission adopted a Communication on Flexibility3, providing
new guidance on how to apply the existing rules of the Stability and Growth Pact, in order to
strengthen the link between effective implementation of structural reforms, investment, and
1
2
3
OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation
of the Stability and Growth Pact and guidelines on the format and content of stability and convergence
programmes”, endorsed by the ECOFIN Council of 3 September 2012, available at:
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm.
Regulation (EU) No 473/2013 of the European Parliament and of the Council on common provisions
for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of
the Member States in the euro area (OJ L 140, 27.5.2013, p. 11).
Commission Communication on making the best use of the flexibility within the existing rules of the
Stability and Growth Pact – COM(2015) 12 final.
2
fiscal responsibility in support of jobs and growth. The Communication does not amend any
provision of the Pact but aims to further reinforce the effectiveness and understanding of its
rules and develop a more growth-friendly fiscal stance in the euro area by ensuring the best
use of the flexibility enshrined within the Pact, while preserving its credibility and
effectiveness in upholding fiscal responsibility. In particular, the Communication clarified
that – in line with the provisions of Article 2(3) of Council Regulation (EC) No 1467/97 - the
Commission – in the context of a report pursuant to Article 126(3) TFEU - will analyse
carefully all relevant medium-term developments regarding the economic, budgetary and
debt positions. It has also clarified that the implementation of structural reforms in the
context of the European Semester is to be considered among these relevant factors.
This report updates the Commission's previous assessment of the excess of the deficit and
debt ratio over the Treaty reference values of 16 November 20154. The November report
concluded that overall the deficit and the debt criteria of the Treaty were considered to be
complied with. On 14 April 2016, Finland submitted its stability programme for 2017 – 2020.
General government debt amounted to 63.1% of GDP in 2015, above the 60%-of-GDP
reference value. Both the stability programme and the Commission 2016 spring forecast
indicate that the gross debt ratio is expected to continue to rise in 2016 and 2017. The notified
debt-to-GDP ratio in 2015 provides evidence of a prima facie existence of an excessive
deficit in Finland in the sense of the Treaty and the Stability and Growth Pact, before,
however, considering all relevant factors as set out below.
The Commission has therefore prepared this report to comprehensively assess the excess over
the Treaty reference values, in order to examine whether they are complied with after all
relevant factors have been considered. Section 2 of the report examines the deficit criterion,
Section 3 the debt criterion and Section 4 deals with the relevant factors. The report takes into
account the Commission 2016 spring forecast released on 3 May 2016.
2.
DEFICIT CRITERION
According to the spring 2016 notification, Finland's deficit amounted to 2.7% of GDP in
2015. The deficit will remain below the Treaty reference value until 2017 both based on the
stability programme and on the Commission 2016 spring forecast. According to the
Commission forecast, the deficit will decline to 2.5% of GDP in 2016 and to 2.3% of GDP in
2017, based on the usual no-policy change assumption. According to the stability
programme, the deficit would decline to 2.1% of GDP by 2017. Hence, the deficit criterion in
the Treaty is fulfilled.
3.
DEBT CRITERION
The general government gross debt-to-GDP ratio increased rapidly over the recent years,
growing from 32.7% of GDP in 2008 to 63.1% in 2015, on the back of high deficits with
respect to nominal GDP developments and stock-flow adjustments arising from the financial
investments of the earnings-related social security funds. The deficit and the stock-flow
adjustment contributed roughly equally to the growth of nominal debt over these years.
4
COM(2015) 803 final,
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/12603_commission/2015-11-16_fi_126-3_en.pdf
3
Finland's stability programme envisages the public debt ratio to increase to 65.0% of GDP in
2016 and to continue increasing to 66.7% of GDP in 2017. The debt-to-GDP ratio is planned
to peak in 2018-19 and reach 67.4%. Thereafter, it is planned to marginally decline to 67.2%
in 2020. According to the Commission 2016 spring forecast, public debt is expected to reach
65.2% of GDP in 2016 and grow to 66.9% of GDP in 2017 (Table 1).
According to the Commission forecast, the projected nominal growth is insufficient to offset
the impact of interest expenditure on the debt ratio in 2016, resulting in a small debtincreasing snowball effect. By 2017 however, the snowball effect is set to fade out. The role
of stock-flow adjustments declines over the forecast horizon, as the surplus of the social
security funds is expected to diminish.
The analysis above thus suggests that, before consideration is given to all relevant factors, the
debt criterion in the sense of the Treaty and Council Regulation (EC) No 1467/97 appears not
to be fulfilled based on Finland's 2016 stability programme as well as the Commission 2016
spring forecast.
Table 1: Debt dynamicsa
Government gross debt ratio
b
Change in debt ratio (1 = 2+3+4)
Contributions:
• Primary balance (2)
• “Snowball” effect (3)
of which:
Interest expenditure
Real GDP growth
Inflation (GDP deflator)
• Stock-flow adjustment (4)
Notes:
2012
52.9
2013
55.5
2014
59.3
2015
63.1
2016
65.2
2017
66.9
4.4
2.5
3.9
3.8
2.1
1.7
0.8
0.7
1.4
0.3
1.9
0.7
1.5
0.7
1.4
0.2
1.1
0.0
1.4
0.7
-1.4
3.0
1.3
0.4
-1.3
0.8
1.2
0.4
-0.9
1.2
1.2
-0.3
-0.2
1.6
1.2
-0.4
-0.5
0.5
1.1
-0.5
-0.6
0.5
a
In percent of GDP.
b
The change in the gross debt ratio can be decomposed as follows:
Dt Dt −1 PD t ⎛ Dt −1 it − y t
−
=
+ ⎜⎜
*
Yt
Yt −1
Yt
⎝ Yt −1 1 + y t
⎞ SFt
⎟⎟ +
⎠ Yt
where t is a time subscript; D, PD, Y and SF are the stock of government debt, the primary deficit, nominal
GDP and the stock-flow adjustment respectively, and i and y represent the average cost of debt and
nominal GDP growth. The term in parentheses represents the “snow-ball” effect, measuring the combined
effect of interest expenditure and economic growth on the debt ratio.
Source : Eurostat and Commission 2016 spring forecast
4
4.
RELEVANT FACTORS
Article 126(3) TFEU stipulates that the Commission's report “shall also take into account
whether the government deficit exceeds government investment expenditure and take into
account other relevant factors, including the medium-term economic and budgetary position
of the Member State in order to decide whether the breach of the criterion merits the launch
of an EDP for the Member State in question." These factors are further clarified in
Article 2(3) of Council Regulation (EC) No 1467/97, which also specifies that “any other
factors which, in the opinion of the Member State concerned, are relevant in order to
comprehensively assess in qualitative terms the excess over the reference value and which the
Member State has put forward to the Council and the Commission” need to be given due
consideration.
The following subsections consider in turn: (1) the medium-term economic position; (2) the
medium-term budgetary position including an assessment of compliance with the required
adjustment towards the medium-term budgetary objective (MTO) and the development of
public investment; (3) the developments in the medium-term government debt position, its
dynamics and sustainability; (4) other factors considered relevant by the Commission; and (5)
other factors put forward by the Member State.
The report reflects the factors mentioned above based on the notified data and the
Commission 2016 spring forecast.
4.1.
Medium-term economic position
Cyclical conditions and potential growth
After Finland's real GDP collapsed by 8.3% in 2009, the country recovered gradually in 2010
and 2011, but experienced a new recession over 2012-14. In 2015, GDP increased by 0.5%.
The growth outlook is expected to improve in 2016 and 2017 (Table 2). The prolonged
downturn has negatively affected Finland's potential growth. Estimated in accordance with
the commonly-agreed methodology, potential growth averaged 0.1% over 2009 to 2015,
being negative (at -0.1%) in 2013 and 2014. In 2016, potential output growth is estimated to
remain unchanged from 2015 whereas in 2017 it is estimated at 0.4%. The contraction of
potential output has been caused by declining contributions of labour inputs and the estimated
negative contribution of total factor productivity, which reflects the ongoing restructuring of
the economy. Moreover, the positive contribution of capital also declined over the crisis
period, due to lower investment. Overall, real GDP in 2015 was 5.3% below the level
recorded in 2008, whereas potential output grew by just 0.5% in total over 2009-2015 period.
This could be explained by the restructuring process, in which the electronics industry has
lost its important role in the Finnish economy and other industries, often with lower
productivity levels, expand their capacity to fill the void. The 2016 Country Report for
Finland has emphasized the endowment of human capital, stable institutional framework and
good conditions for doing business as fundamental strengths that should contribute to total
factor productivity growth in the future.
With real GDP below potential over 2012-14, the output gap widened to -2.8% of potential
GDP in 2014 and is estimated to have reached -2.3% in 2015 as GDP grew above potential.
In 2016, GDP growth is also forecast to remain above potential growth, reducing the output
gap to -1.6% of GDP.
5
Table 2: Macroeconomic and budgetary developmentsa
2016
2017
2012
2013
2014
2015
COM
COM
COM
COM
COM
National
authorities
COM
National
authorities
Real GDP (% change)
Potential GDP (% change)
-1.4
0.0
-0.8
-0.1
-0.7
-0.1
0.5
0.0
0.7
0.0
0.9
0
0.7
0.4
1.4
0
Output gap (% of potential GDP)
-1.6
-2.3
-2.8
-2.3
-1.6
-1.9
-1.2
-1.2
General government balance
Primary balance
One-off and other temporary
measures
Government gross fixed capital
formation
Cyclically-adjusted balance
-2.2
-0.8
-2.6
-1.4
-3.2
-1.9
-2.7
-1.5
-2.5
-1.4
-2.5
-1.4
-2.3
-1.1
-2.1
-1.0
-0.1
-0.1
0.1
0.0
0.0
0.0
0.0
0.0
4.0
4.2
4.1
4.0
4.1
4.1
4.1
4.1
-1.2
-1.3
-1.6
-1.4
-1.6
-1.5
-1.5
-1.4
0.2
0.0
-0.3
-0.2
-0.5
-0.3
-0.4
-0.3
-1.2
0.3
-1.2
0.0
-1.6
-0.4
-1.4
-0.2
-1.6
-0.5
-1.5
-0.3
-1.5
-0.4
-1.4
-0.3
Cyclically-adjusted primary balance
b
Structural balance
Structural primary balance
Notes:
a
In percent of GDP unless specified otherwise.
b
Cyclically-adjusted balance excluding one-off and other temporary measures.
Source : Eurostat and European Commission 2016 spring forecast, 2016 Draft Budgetary Plan
When corrected for the effects of the cycle over the last three years, the debt ratio in 2015
remained below the Treaty reference value, but this is no longer expected to be the case in
2016. Based on the Commission 2016 spring forecast, cyclically-adjusted debt is estimated at
61.8% of GDP in 2016 and 65.0% in 2017 (Table 3).
Table 3: General government deficit and debt (% of GDP)
Deficit
criterion
General government balance
Debt
criterion
General government gross
debt
General government gross
debt adjusted for the effect of
the cycle
2012
2013
2014
2015
-2.2
-2.6
-3.2
-2.7
-2.5
-2.5
-2.3
-2.1
52.9
55.5
59.3
63.1
65.2
65.0
66.9
66.7
58.5
61.8
2016
National
COM
authorities
2017
National
COM
authorities
65.0
Sources: Eurostat, European Commission 2016 spring forecast, 2016 Stability Programme, data communicated by the national authorities
Recent structural reforms
Finland has implemented structural reforms with the view to reducing government
expenditure and to increase the growth potential of the economy. The pension reform
eventually linking the statutory retirement age to life expectancy has been enacted and will
start to have impact as of 2017. The government has announced its orientations regarding the
updated plan to reform the healthcare and social services, in order to bring their expenditure
growth under control.
Pensions. The most important recent reform is the pension reform legislated at the end of
2015 which enters into force in 2017. The reform links the retirement age to life expectancy
6
as recommended by the Council. According to the national authorities, the reform is expected
to improve long-term fiscal sustainability. No decision has been taken under the current
pension reform regarding the extended unemployment benefits for workers close to the
retirement age. This could limit the positive impact that the pension reform is expected to
have on the labour supply, as older unemployed will remain eligible for unemployment
benefits until reaching the pension age.
Labour market. On an aggregate level, wage increases have been moderate since the
centrally agreed wage deal of late 2013 that has been extended into 2016. However, in the
low inflation and low growth environment, the strategy of restoring cost competitiveness
through low wage adjustments has had only a limited effect. On 29 February 2016, the
central labour market organisations reached an agreement, refered to as the Competitiveness
Pact, to increase, from 2017, annual working time without additional compensation, not to
carry out any centrally agreed wage increases in 2017 and to shift social security
contributions more towards the employees. Public sector employees' holiday bonuses would
be temporarily reduced by 30%. There is also an intention to extend the possibilities for local
bargaining. Employer and employee organisations have started sectoral collective agreement
negotiations on introducing the terms of the Competitiveness Pact into industry level
agreements. These will determine whether the Pact will be implemented.
In parallel, the government launched in April 2016 a reform of unemployment security aimed
at encouraging quick acceptance of job offers and tightening the obligation to accept work as
well as the obligation to participate in employment-promoting activation measures. In
addition, shortening the duration of earnings-related unemployment security by one fourth is
foreseen. In 2017 and 2018, unemployment benefits may, under certain conditions, be used to
finance mobility grants, start-up grants and wage subsidies.
Administrative reform. The government is advancing the reform proposal for improving the
arrangement of social and healthcare services. The government aims at preparing the
legislative proposals by the end of 2016 and to implement the reform from 2019 onwards.The
aim is to reduce health disparities and to better control the costs. A regional government
(county) system will be established, led by councils elected by direct elections. In addition to
social and healthcare services, the counties would also be given other duties such as rescue
services, environmental healthcare, regional development and business-promotion and landuse management. The reform will extend the freedom of choice of social welfare and
healthcare services, thus also promoting competition in the provision of social and healthcare
services. The social and healthcare services reform aims to achieve total savings of EUR 3
billion (1.5% of GDP) in the long term through the comprehensive integration of social and
healthcare services, larger entities in charge of providing the services than at present, and
digitalisation.
Services markets. The most significant legislative change in the retail sector has been the
liberalisation of the opening hours of shops from the beginning of 2016. At the beginning of
February 2016, an amendment to the Land Use and Building Act came into force. This will
accelerate regional land use planning and increase the opportunities for regional councils to
react more quickly to changes in the operating environment of the wholesale and retail trade.
7
4.2.
Medium-term budgetary position
Structural deficit and fiscal consolidation
In 2015, the structural balance improved by 0.2 pp of GDP, exceeding the recommended
adjustment towards the MTO, and the expenditure benchmark was met with a margin of 0.7%
of GDP. Therefore, Finland was compliant with the requirements of the preventive arm in
2015.
In 2016, the structural balance is set to worsen by 0.2pp, pointing to a risk of a significant
deviation (gap of -0.7% of GDP) from the required adjustment of 0.5% of GDP. The
expenditure benchmark is met. This calls for an overall assessment. On the one hand, the
current estimate of potential GDP growth underlying the structural balance estimate (0.0%) is
lower than the medium-term average used in the expenditure benchmark (0.8%, frozen based
on the Commission 2013 winter forecast). The latter can no longer be considered fully
relevant given that the prolonged downturn has durably affected Finland’s medium-term
growth prospects. Indeed, if the medium-term potential growth rate underlying the
expenditure benchmark were to be updated based on the data in the Commission 2015 spring
forecast (as will be the approach from 2017 onwards), the expenditure benchmark would not
be fully met but would indicate some deviation from the adjustment path towards the MTO.
On the other hand, the difference between the signals given by the two pillars also reflects the
effects of lower than expected inflation. In the draft budgetary plan for 2016, submitted in
November 2015, the GDP deflator was forecast at 1.2%. A similar forecast was made by the
Commission in autumn 2015. In the 2016 spring forecast, the GDP deflator is forecast at
0.8%. This negatively affects public revenues through reduced tax collection. Although most
of the social security transfers are indexed to the CPI, for 2016 there was already a previous
decision to freeze the index adjustments. Therefore the lower-than-expected inflation has had
less of an impact on the public expenditures and the overall impact on the general
government balance has been negative. Whereas during the time of the preparation of the
2016 budget the headline balance was expected to improve by 0.5 pp (in the Commission
2015 autumn 2015 forecast), the improvement based on the spring 2016 forecast is 0.2pp.
Although the lower improvement in the headline balance is partly explained by the additional
immigration-linked expenditure that was added to the 2016 budget proposal after the draft
budgetary plan was presented, the lower improvement in headline balance is also the result of
the lower inflation. In addition, there are no windfall gains for the Finnish public sector from
the low interest rate environment, because the lower interest expenditure is more than offset
by the lower interest revenues received by the social security funds. Taking into account
these factors, the structural balance pillar would indicate some deviation from the adjustment
path towards the MTO.
Considering these factors, the overall assessment points to a risk of some deviation from the
recommended adjustment path towards the MTO in 2016. In its 2016 Stability Programme,
Finland requested that expenditure linked to additional immigration, amounting to 0.2% of
GDP would be taken into account while assessing the progress towards the MTO. If this
estimate of the increase in refugee-related expenditure was excluded from the deficit, the
conclusion of the overall assessment would remain unchanged.
Government expenditure and investment
Government investment as a share of GDP has increased since 2008 when gross fixed capital
formation by the government sector amounted to 3.6% of GDP. In 2015 it amounted to 4.0%
8
of GDP in 2015. According to the stability programme, investment is expected to amount to
4.1% of GDP in 2016 and 2017. Throughout the period, the general government deficit ratio
in both headline and structural terms is lower than the government investment-to-GDP ratio.
Overall, general government investment, as a share of GDP, is among the highest in the euro
area.
Finland's general government sector has recorded primary deficits since 2012 and is expected
to remain in primary deficit also over 2016- 2017. The effective interest rate paid on debt has
decreased significantly in recent years. Interest expenditure, as a share of GDP, is forecast by
both the Commission as well as by the national authorities to fall over the forecast horizon.
Finland's public finances, however, do not benefit from the decline in interest rates as public
sector assets (at the end of 2015, employment pension schemes managed assets that
amounted to 85% of GDP, total assets of the general government amounted to ca 130% of
GDP based on the national accounts data) have been partially invested in interest-bearing
assets. The loss of interest revenue there more than offsets the gain from the reduced interest
expenditure on government debt.
Current expenditure excluding interest has been on an increasing trend. In fact, it increased
by 9 pps. of GDP since 2005. It should be noted that 6.5 pps. of the change occurred in 2009,
when nominal GDP contracted by 6.5%. At 58.3% of GDP, the level was the highest in the
EU in 2015 Expenditure has increased in all sub-sectors of the general government over the
years 2004 to 2014, but the increase has been proportionally highest in the earnings-related
pension funds sector. When considering general government expenditure by function, it
appears that expenditure growth is mainly driven by healthcare and pension expenditure,
reflecting the ageing of society. Expenditure has also increased for general public services,
despite the fact that expenditure related to public debt transactions (i.e. interest expenditure),
which is taken into account under this category, has fallen as a share of GDP.
4.3.
Medium-term government debt position
Long-term sustainability of public finances
The general government gross consolidated debt-to-GDP ratio stood at 63.1% of GDP in
2015. Based on medium-term projections building on the Commission's spring 2016 forecast,
the debt is expected to rise to close to 76% of GDP by 2026 (based on the no-policy-change
scenario, under the assumption that the structural primary balance position evolves according
to the Commission's spring 2016 forecast until 2017), remaining above the 60%-of-GDP
Treaty threshold. The increase would be mostly driven by the costs of ageing. Based on the
Stability Programme scenario, which assumes that the budgetary plans in the programme are
fully implemented, the debt-to-GDP ratio would increase more slowly, reaching ca 72% by
2026.
Finland is assessed to be at low risk of fiscal stress in the short term, but is at high
sustainability risk in the medium term and medium risk in the long term due to the budgetary
impact of the cost of ageing. The focus, therefore, should be on containing age-related
expenditure growth further so as to contribute to the sustainability of public finances in the
medium and long run. The impact of the latest pension reform, legislated in autumn 2015,
will be included in the assessment once the Economic Policy Committee has conducted its
peer review, following Finland's request.
9
Stock-flow adjustment
The stock-flow adjustment has a large impact on general government debt developments in
Finland. This i.a. reflects the general government's high net-financial-assets position, at
50.7% of GDP in 2015, down from 54.0% of GDP in 20145. The OECD projects net assets to
amount to 47.0% of GDP by the end of 2016. Among OECD countries, this is one of the
highest positive net financial asset positions. The stock-flow adjustments routinely occur as
the earnings-related pension system, included in the general government sector, is partially
pre-funded and is in surplus. The surplus is included in the general government balance but is
not used to pay off general government debt. These funds are accounted for as net
accumulation of assets in the stock-flow adjustment.
In 2012, the stock-flow adjustment accounted for 70% of the increase in the debt-to-GDP
ratio. Thereafter, in 2013 - 2014, the adjustment accounted for roughly 30% of the change in
the debt ratio. In 2015, the impact of the stock-flow adjustment was again higher, amounting
to 40% of the change in debt-to-GDP ratio. This was caused by employment pension schemes
selling the majority of their holdings of central government bonds, thereby reducing the
amount of intra-government debt that is taken into account in the general government debt
consolidation process from 2.6 billion euros in 2014 euros to 1 billion euros in 2015. Such
sale was economically reasonable as the market value of Finland's debt is higher than the
nominal value. The funds' investment decisions are independent from the central government,
although the funds are under the regulatory oversight by the government. The funds are not
mandated to have holdings of Finnish government debt. Therefore, the sale of government
bonds owned by the pension funds could continue further, increasing the gross consolidated
debt-to-GDP ratio. Due to the independent nature of the investment decisions, it is
complicated to forecast the sale or acquisition of central government debt by the pension
funds. However, the forecast for 2016 assumes that the impact of the stock-flow adjustment
will be lower than in 2015. In 2016, the Stability Programme projects the pension funds'
surplus to stand at 1.1% of GDP.
Total stock of debt guaranteed by the government
Finland had central government guarantees amounting to 21.5% of GDP in 2015, up from
17.4% of GDP in 2014. This ratio is high in comparison to other European countries.
Guarantees linked to the financial sector amounted to 1.9% of GDP in 2015. At the end of
2015, a total of 41% of the stock of central government guarantees consisted of guarantees to
enterprises (excl. housing corporations). These are issued to a wide group of non-financial
corporations, mainly through the Finnvera corporation - a specialised state-owned financing
company promoting export and growth of enterprises. Guarantees granted to housing
corporations account for 23% and those to the rest of the world for 15% of the stock of
guarantees. The remaining 21% is divided between households (mainly student loans),
financial and insurance corporations and general government. The losses linked to the
guarantees have been low until now.
Impact of the cycle
Finland has experienced bad economic times over 2012-13, and a large negative output gap,
estimated at -2.9 % of GDP in 2014, has opened. The debt-to-GDP ratio is thus strongly
influenced by cyclical developments. When corrected for the effects of the cycle, the
5
OECD Economic Outlook no 98, Annex Table 33.
10
Commission forecast for general government debt is estimated to have stood at 58.5% of
GDP in 2015, but to be above the reference value in 2016 (61.8% of GDP).
4.4.
Other factors considered relevant by the Commission
Financial stabilisation operations
Among the other factors considered relevant by the Commission, particular consideration is
given to financial contributions to fostering international solidarity and achieving the policy
goals of the Union, the debt incurred in the form of bilateral and multilateral support between
Member States in the context of safeguarding financial stability and the debt related to
financial-stabilisation operations during major financial disturbances (Article 2(3) of
Regulation (EC) No 1467/97).
In assessing compliance with the debt criterion, financial assistance to euro-area Member
States with a debt-increasing impact has been taken into account. According to the
Commission 2016 spring forecast, the cumulative impact of this assistance would amount to
2.8% of GDP in 2015. Thus, Finland's general government gross debt would have been at
60.3% of GDP in 2015 and would be at 63.9% in 2016 if the debt related to financialstabilisation operations was deducted.
4.5.
Other factors put forward by the Member State
On 9 April 2016, the Finnish authorities transmitted a letter with relevant factors pursuant to
Article 2(3) of Regulation (EC) No 1467/97. The authorities emphasised the impact of the
cycle on general government debt, compliance with the obligations under the preventive arm
of the SGP, the government's commitment to the fiscal consolidation target set in the
government programme, and the growth-enhancing structural reforms that are currently being
prepared. In addition, Finland put forward the impact of the immigration-related expenditure,
analysed the impact of low inflation environment on public revenues and expenditures and
also concluded that the negative net impact from the low interest rate environment on the
general government balance could amount to 0.3% of GDP in 2015 due to the lower revenues
from the interest-bearing assets, mostly owned by the employment pension schemes.
The factors put forward by the Finnish authorities have been taken into account in the present
report. The impact of the cycle has been analysed in Section 4.1 and compliance with the
obligations under the preventive arm is assessed in Section 4.2. In assessing the compliance
with the preventive arm, the low-inflation environment, impact of the low interest rate
environment and the immigration-related expenditure are also taken into account. Structural
reforms are considered in Section 4.1.
5.
CONCLUSIONS
The general government gross debt increased to 63.1% of GDP in 2015, above the Treaty
reference value. The 2016 Stability Programme envisages it to reach 65.0% of GDP in 2016
and 66.7% of GDP in 2017. Similarly, the Commission 2016 spring forecast projects gross
debt above the reference value, at 65.2% of GDP in 2016 and 66.9% in 2017. In 2015, the
breach of the debt criterion was no longer fully explained by Finland's financial support to
safeguard the financial stability in the euro area, but the debt-to-GDP ratio would have been
at 60.3%, narrowly over the Treaty reference value. The debt-to-GDP ratio increased strongly
in 2015 due to the stock-flow adjustments, as the social security funds, part of general
11
government, were liquidating some of their holdings of the central government securities.
The social security funds have accumulated assets in parallel to the increase of the central and
local government debt and these assets far outweigh the debt, resulting in positive net asset
position of the general government. Additionally, it should be noted that the debt ratio
reflects the effects of Finland's current cyclical position. Debt corrected for the effects of the
cycle would have remained below 60% of GDP in 2015, but would be above the reference
value in 2016.
This report also examined other relevant factors, notably finding that Finland is expected to
broadly comply with the recommended adjustment path towards the MTO in 2016, which
should help ensure – in the medium term – that debt decreases at a sufficient pace.
On this basis, the analysis presented in this report suggests that the debt criterion as defined
in the Treaty and in Regulation (EC) No 1467/97 should be considered as currently complied
with. However, as Finland's debt-to-GDP ratio has been on an increasing trend, and it is
forecast to continue rising over the medium term under a no-policy-change assumption, the
structural reforms increasing productivity and supply of labour are key to enhance Finland's
growth prospects in the medium term. Their swift adoption and implementation would
contribute to address the country-specific recommendations and improve fiscal sustainability.
12